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Did Jimmy Carr just use the wrong vehicle?

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A year on from when comedian Jimmy Carr apologised for using a legal tax avoidance scheme which enabled him to pay as little as 1% tax on his earnings, and with GAAR upon us, tax avoidance has rarely been out of the news headines.

Prime Minister David Cameron stated that “… some of these schemes we have seen are quite frankly morally wrong”, and Danny Alexander, chief secretary to the Treasury, suggested that tax avoiders are the “… moral equivalent of benefit cheats”.

Whether you feel that David Cameron has the moral high ground given the alleged source of his family’s wealth, and whether you feel he was right to name Jimmy Carr in this way, are discussions for another day, but what the comedian had done was entirely legal, so what is the real problem here?

Do we really think that the tax system is a level playing field and that there is a ‘right amount of tax’ we should be paying, and that everyone on similar earnings pays the same amount of tax?

Well think again, because it just ain’t so!

Let’s take for example three fictional friends in the 2012-13 tax year, each of whom receive an income of £25,000.

Tom works for an employer and receives a salary each month from which tax and Class 1 National Insurance is deducted under PAYE; from his £25,000 earnings he might expect to see £19,532 in his pocket, and additionally, the employer has had to pay a further £2,417 for the privilege of employing him.

Dick is a self-employed plumber and his £25,000 income has been calculated from the sales less the expenses of running his business; he would expect to see £19,917.65 in his pocket at the end of the year having paid the tax, and both Class 2 and Class 4 National Insurance due under ‘self assessment’.

Harry didn’t work during the year but was fortunate enough to sell an antique that had been ‘kicking around’ at home for years; after paying Capital Gains Tax he would expect his £25,000 income to be reduced to a net £22,408.

At these modest income levels even relatively small variations can be significant and whilst we can argue about the relative merits of whether the working men and women in the UK should be paying tax at a higher rate than those who can live off the proceeds of asset sales, the central issue here is that because the tax system creates such disparities it is a racing certainty that those who are having to pay tax will, if they are able, seek to arrange their affairs in such a way that they minimise their tax liability.

And it doesn’t stop there.

I have clients who have more than one source of income and because of the way the tax system is arranged into ‘schedules’ it is not automatic that income from once source can be offset against losses from another source, so there have been years in which the client has no overall income, or even a ‘net loss’, but will still be liable for tax on the income from a particular source.

I think we would have to conclude that HM Revenue and Customs are not so much on the side of fairness and equity as that of maximising tax receipts. Indeed in a recent informal conversation a retired tax inspector noted that the “… tax rules are complicated …”, and when HMRC uses those rules to maximise tax collections they are said to be “… applying the law …”, but when a taxpayer uses those same rules to minimise the tax he or she pays, they are said to be “… tax cheats …”, “… tax avoiders …”, or worse.

In Ayrshire Pullman Motor Services & Ritchie v IR Commrs (1929) 14 TC 754, Lord Clyde stated that ‘no man is under the smallest obligation, moral or other, to arrange his legal relations to his business as to enable the Inland Revenue to put the largest shovel into his stores’.

This was endorsed by Lord Tomlin in IR Commrs v Duke of Westminster [1936] 19 TC 490, in which he stated that ‘every man is entitled if he can, to order his affairs so that the tax attaching under the appropriate acts is less than it would otherwise be’.

There has been a good deal of legislation and case law in the intervening period but today we have a whole industry which has grown up around legally minimising the tax their clients need to pay, with HM Revenue and Customs playing catch up and introducing ever more and complex legislation to plug the loopholes that the legislation itself creates.

Anecdotally I believe there is evidence that as tax rates increase so do the number of taxpayers seeking help to minimise their tax liability, and that again would not be a great surprise to me if found to be true. It seems to me that the only real beneficiaries are the ranks of lawyers on both sides.

So how do we halt the madness?

The Office of Tax Simplification has identified various areas ripe for reform, but in my view at least this amounts to ‘tinkering round the edges’, and in the meantime, the 2012 Finance Bill has added almost 700 pages of legislation.

Perhaps we should look at real simplification such as a flat rate tax for all income in a period, from whatever source, with a few (very few) exemptions such as the profit on the sale of one’s family home?

Yes, I know that immediately we introduce exemptions and exceptions there will be opportunities for those seeking to avoid tax, but if the system is seen to be ‘simple’, and more importantly ‘fair’, my belief is that the incentive for avoidance will all but evaporate, and at the very least we might see a reduction in the cost of collecting tax.

Time for real change?

Paul Driscoll is a Chartered Management Accountant, a director of Central Accounting Limited, Cura Business Consulting Limited, Hudman Limited, and AJ Tensile Fabrications Limited, and is a board level adviser to a variety of other businesses.


1 Comment

  1. […] people who ‘don’t pay their fair share of tax’ (if there is such as thing – see Did Jimmy Carr just use the wrong vehicle?) we have to remember that tax avoidance is entirely legal as it simply takes the rules and […]

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